FILED JUL 1 2021 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT
In re: BAP No. SC-20-1154-SGB SEAN PAUL NEVETT and SHANNON LEE NEVETT, Bk. No. 15-07986-CL7 Debtors. Adv. No. 18-90038-CL SEAN PAUL NEVETT, Appellant, v. MEMORANDUM* UNITED STATES TRUSTEE, Appellee.
Appeal from the United States Bankruptcy Court for the Southern District of California Christopher B. Latham, Bankruptcy Judge, Presiding
Before: SPRAKER, GAN, and BRAND, Bankruptcy Judges.
INTRODUCTION
Sean Paul Nevett appeals from the bankruptcy court’s denial of his
discharge under § 727(a)(3) 1 for failing to keep records of his use of loan
proceeds he received from Mitch Pullman and Heath Bell, dating as far
* This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential value, see 9th Cir. BAP Rule 8024-1. 1 Unless specified otherwise, chapter and section references are to the Bankruptcy
Code, 11 U.S.C. §§ 101–1532, “Rule” references are to the Federal Rules of Bankruptcy Procedure, and “Civil Rule” references are to the Federal Rules of Civil Procedure. 1 back as six years before he filed bankruptcy. Mr. Nevett contends that the
court clearly erred when it imposed a six-year “lookback” on his duty to
keep records of his material transactions. He contends that given the age of
the two loans, his failure to keep adequate records was justified. He
alternately asserts that even without records of his use of these loan
proceeds, he produced ample documents to the United States Trustee
(“UST”), which provided a clear and complete understanding of his
current financial condition at the time he filed for bankruptcy.
The bankruptcy court determined otherwise, based largely on the
nature of Mr. Nevett’s business dealings, the amount of money lent to him
in the years before he filed bankruptcy, the scarce funds in his possession
at the time he filed bankruptcy, and Mr. Nevett’s inconsistent testimony
regarding how he had used the Pullman and Bell loan proceeds. Forced to
speculate about what happened to the full amount of the Pullman and Bell
loan proceeds, the court disagreed that Mr. Nevett had otherwise provided
sufficient information to discern his current financial condition.
We find no reversible error in the bankruptcy court’s determinations.
Accordingly, we AFFIRM.
FACTS
A. Mr. Nevett’s background, the bankruptcy, and the UST’s initial discovery.
Mr. Nevett holds a bachelor’s degree in real estate finance from the
University of Southern California. For several years he held a stockbroker’s
2 license (series 7 and 24). Over the span of thirty years he initially was
employed as a stockbroker and later formed his own consulting and
investment services companies.
The Nevetts commenced their bankruptcy case by filing a joint
chapter 7 petition in December 2015. They listed total assets of
$1,720,002.49 and total liabilities of $7,320,467.61. Of their liabilities, nearly
$6,000,000 was owed to their general unsecured creditors. The Nevetts
listed the vast majority of their general unsecured debt as “business
obligations.” In fact, $5,178,842 of this debt originated from loans Mr.
Nevett received from eleven individuals ranging from 2009 through 2015.
This appeal arose from the UST’s efforts to understand how Mr. Nevett
used these loan proceeds. Though he borrowed over $5,000,000, at the time
of their bankruptcy filing the Nevetts had less than $10,000 in cash and
bank account balances.
The UST examined the Nevetts at the § 341(a) first meeting of
creditors and subsequently requested a number of documents to better
understand the Nevetts’ financial condition. The UST reviewed documents
produced by them in September 2016 and January 2017. The UST then
sought documentation explaining the disposition of the loan proceeds from
the individual lenders. In March 2017, the UST and Mr. Nevett stipulated
to an examination and production of documents under Rule 2004. Again,
the UST sought documentation explaining Mr. Nevett’s receipt and
disbursement of the loan proceeds. The Rule 2004 exam was conducted and
3 continued from time to time beginning in April 2017 and ending in
February 2018.
B. The UST’s objection-to-discharge complaint.
Unsatisfied with the completeness and perceived reliability of Mr.
Nevett’s explanation, the UST filed a complaint in March 2018 objecting to
Mr. Nevett’s discharge under § 727(a)(3) and (5). The complaint detailed
the Nevetts’ assets and liabilities as stated in their schedules. It also
referenced Mr. Nevett’s disclosure of his prepetition income from
operating his consulting services business through Checkpoint Marketing,
Inc. But the complaint focused on the $5,178,842 in loans from the
individual lenders. The UST alleged that Mr. Nevett had no documentation
explaining the disposition of the $1,500,000 in loans he received from
Deanne Gage ($25,000 loaned in 2010), Heath Bell ($500,000 loaned in
2011), Mitch Pullman ($475,000 loaned between 2009 and 2010),2 and Steve
Zeldin ($500,000 loaned in 2009).
The complaint based this allegation on Mr. Nevett’s Rule 2004
examination, during which he testified that he had no records to support
his use of the $1,500,000 in loan proceeds. The complaint also referenced
the inconsistency between his Rule 2004 examination testimony and his
sworn schedules. The schedules identified the loans from individual
lenders as “business obligations,” but Mr. Nevett later testified that he used
2 Pullman lent Mr. Nevett a total of $900,000. However, as per the complaint, Mr. Nevett only failed to provide documentation accounting for $475,000 of the $900,000. 4 some of the loan proceeds to pay credit card bills, home mortgage
installments, and utility bills.
C. The UST’s summary judgment motion and Mr. Nevett’s response.
The UST moved for summary judgment focusing on Mr. Nevett’s
admitted lack of documentation supporting his claimed disposition of the
$1,500,000 in loan proceeds. The UST contended that Mr. Nevett failed to
maintain adequate books and records pertaining to these proceeds. As a
result of this failure, the UST posited that it could not meaningfully
ascertain his financial condition and the nature of some of his material
business transactions. This, the UST argued, justified denial of his
discharge under § 727(a)(3). According to the UST, given Mr. Nevett’s
education in finance, his securities background, and his experience in
providing consulting and investment services through his wholly-owned
companies, he qualified as a highly-sophisticated debtor, who reasonably
could be expected to maintain records regarding his use of the $1,500,000 in
loan proceeds which were ostensibly procured as business obligations.
And his unjustified failure to do so was sufficient to support its § 727(a)(3)
claim.
As for its § 727(a)(5) claim, the UST argued that the same facts
demonstrated the requisite failure to adequately explain the absence of the
loan proceeds as part of Mr. Nevett’s assets at the time of his bankruptcy
filing.
5 Mr. Nevett opposed the summary judgment motion. He argued that
he produced sufficient documentation to give the UST a “clear picture of
[his] financial condition” during the four years immediately preceding his
bankruptcy filing — from January 2012 to December 2015. As Mr. Nevett
explained, he provided the UST with a plethora of documents from this
period, including complete sets of personal and business bank account
statements, credit card statements, and tax returns. He further pointed to
the promissory notes and check registers he produced. He insisted that
these documents provided the UST with “specific transactions and
accountings for much of the loans received between years 2012 to 2015.”
With respect to the $1,500,000 in loan proceeds, Mr. Nevett explained
that these loan proceeds were paid to him (or on his behalf) during the time
period between 2009 and 2011—a period for which his records admittedly
were incomplete. However, Mr. Nevett insisted that for the subject loans,
whenever his documentation was incomplete, he specified third parties
from whom documentation might be obtained.
D. Mr. Nevett’s explanation for the subject loans in response to the summary judgment motion.
1. Bell loan transaction ($500,000 to invest in Location Based Technology for or on behalf of RFF Family Partnership).
As part of his summary judgment opposition, Mr. Nevett recounted
his Rule 2004 exam testimony wherein he explained to the UST that the
$500,000 he received from Heath Bell was used to purchase and exercise an
6 option for 1,000,000 shares of Location Based Technology at $0.50 per
share. According to Mr. Nevett, he told the UST that Location Based
Technology’s transfer agent — Transhare — delivered the stock shares
directly to one of his other lenders (the RFF Family Partnership), which
liquidated the shares to pay off a debt Mr. Nevett owed to that lender.
According to Mr. Nevett, he offered to subpoena these records from
Transhare, but the UST declined the offer.
2. Zeldin loan transaction ($500,000 to pay off Wells Fargo Advisors’ margin call).
With respect to the $500,000 loan from Steve Zeldin, Mr. Nevett
initially testified at his Rule 2004 examination that he did not have any
records regarding its use because the entire amount was paid directly by
Zeldin to Wells Fargo Advisors to pay off Mr. Nevett’s margin call
obligation. However, his summary judgment opposition included a bank
statement reflecting a wire transfer from Zeldin to Well Fargo Advisers for
$494,224.17. Mr. Nevett stated that this wire transfer record was the record
of the disposition of the Zeldin loan proceeds.
3. Gage loan transaction ($25,000 to invest in Hawaii Mona Protein Powder).
As for the $25,000 Gage loan, Mr. Nevett stated that it was used as
part of his investment in a company known as Hawaii Mona Protein
Powder, which ultimately failed. But he admitted that he did not have in
his possession or control any documents reflecting that investment.
7 4. Pullman loan transaction ($475,000 to invest in O’Quinn LLC and in Transpacific Aerospace).
Finally, as for the $475,000 Pullman loan, Mr. Nevett asserted that
$400,000.00 was invested in a company known as O’Quinn LLC, from
whom supporting records presumably could be subpoenaed – even though
Mr. Nevett said O’Quinn was the subject of its own bankruptcy case. The
remaining $75,000 portion of the Pullman loan was used to purchase stock
in a company known as Transpacific Aerospace. Though Mr. Nevett was
unable to provide any evidence of the $400,000 that he purportedly
invested in O’Quinn, LLC, Mr. Nevett provided the UST with the stock
certificate for Transpacific Aerospace to account for the $75,000 loaned by
Pullman.
In short, Mr. Nevett argued that given the age of these loans — some
of them dating back as many as six years before his bankruptcy filing — his
explanation and production of supporting documents was reasonable and
adequate under the circumstances.
E. The bankruptcy court’s interim order on the summary judgment motion.
After considering the parties’ summary judgment papers, the court
accepted the documentation supporting Mr. Nevett’s claimed disposition
of the Zeldin loan ($500,000) and $75,000 of the Pullman loan proceeds. The
court held that summary judgment was inappropriate as this
8 documentation raised a genuine dispute whether Mr. Nevett had produced
sufficient records as to those loans.
With respect to the Bell loan ($500,000), the larger Pullman loan
($400,000), and the Gage loan ($25,000), the court ruled that there was no
factual dispute that Mr. Nevett had failed to maintain any records relating
to these transactions. As the court determined, there also was no genuine
dispute that the absence of such records prevented the UST from fully
understanding Mr. Nevett’s financial condition at the time of his
bankruptcy filing and his material business transactions. The court
explained that these facts — established for purposes of summary
judgment — shifted the burden to Mr. Nevett to show that his failure to
maintain such records was justified under the circumstances. According to
the court, there was a genuine issue of material fact regarding whether the
Bell, Pullman, and Gage loans were so temporally remote from Mr.
Nevett’s bankruptcy filing as to render it unreasonable to expect Mr.
Nevett to have retained any records respecting his use of the loan proceeds
from these transactions.
As a result, the court ordered the summary judgment proceeding
held in abeyance and set this factual issue for trial.3
3 The bankruptcy court never returned to the question of whether Mr. Nevett presented sufficient records of the Zeldin loan and smaller Pullman loan ($75,000). 9 F. Trial and the court’s post-trial findings.
The court held a one-day trial on May 14, 2019. The court initially
admonished the parties that the trial was limited to the issue of justification
and what constituted a reasonable lookback period for requiring Mr.
Nevett to keep records regarding his use of the Gage, Pullman, and Bell
loan proceeds. The court told the parties that they need not and should not
present evidence at trial regarding the matters it deemed established after
it heard the UST’s summary judgment motion.
After holding the trial, the court rendered its “Factual Findings After
Evidentiary Hearing.” The court did not, however, limit its findings to the
issues of justification and the reasonable lookback period for Mr. Nevett’s
use of the subject loan proceeds. Rather, it made findings concerning Mr.
Nevett’s use of the Pullman (larger), Bell, and Gage loan proceeds.
More specifically, Mr. Nevett’s check registers and related trial
testimony established that only $28,000 of the $400,000 Pullman loan
proceeds were used for purposes other than investing in O’Quinn LLC.
The court pointed out that this trial testimony conflicted with Mr. Nevett’s
Rule 2004 examination testimony that he had used the entire $400,000 of
the Pullman loan proceeds to invest in O’Quinn. Regardless of how Mr.
Nevett actually used the Pullman loan proceeds, there remained no records
for the disposition of $372,000 of these proceeds.
At trial, Mr. Nevett’s account of how he used the Bell loan proceeds
changed even more dramatically. While he had previously stated in
10 opposition to the UST’s motion for summary judgment that he used the
entire $500,000 loan to purchase 1,000,000 shares of Location Based
Technology stock and then delivered the shares to the RFF Family
Partnership, Mr. Nevett used his check registers and related trial testimony
to show that $491,000 of the $500,000 Bell loan proceeds were used for
purposes other than investing in Location Based Technology. He testified
that based on the check register he presented as his Trial Exhibit A, he
actually used $491,000 of the Bell loan proceeds “to make payments on
pending bills, debts and loan payments.” While inconsistent with Mr.
Nevett’s prior explanations, the court credited the check registers as
accurate and contemporaneous records of the disbursement of $491,000 of
the Bell loan proceeds. But there remained no disbursement records for the
$9,000 balance of the Bell loan.
As for the $25,000 Gage loan transaction, the court noted Mr. Nevett’s
proffered explanation that he invested in a company called Hawaii Mona
Protein Powder was “inadequate on its face.” Yet, the court also considered
the size of the loan, its age, and the fact that Mr. Nevett testified at trial that
he largely repaid this loan. The court accepted this trial testimony and
concluded that the Gage loan transaction and Mr. Nevett’s use of the
proceeds was not a material transaction for which Mr. Nevett reasonably
could have been expected to retain records.
In sum, the UST commenced the case because Mr. Nevett had failed
to provide adequate records for $1,500,000 in loan proceeds he had
11 received. Mr. Nevett was eventually able to produce adequate records for
$575,000 of those loan proceeds in response to the UST’s motion for
summary judgment, and the bankruptcy court held on summary judgment
that he had failed to produce adequate records for the remaining $925,000
in loan proceeds. This prompted the trial at which Mr. Nevett then
presented adequate documentation accounting for another $544,000 of the
remaining loan proceeds. On the other hand, after trial there were still no
records explaining Mr. Nevett’s use of $381,000.00 of the loan proceeds
from the Pullman and Bell loans, and the court determined that Mr.
Nevett’s failure to keep such records was unreasonable for purposes of
§ 727(a)(3).
In addition, the bankruptcy court revisited and reaffirmed its earlier
summary judgment determination that, under all the circumstances,
records regarding these transactions were necessary in order to enable the
UST to fully understand Mr. Nevett’s financial condition and material
transactions — especially in light of the conflicting trial evidence regarding
his use of the Pullman and Bell loan proceeds.
With respect to the justification issue and what constitutes a
reasonable lookback period, the bankruptcy court again examined all of the
circumstances and found that the Pullman and Bell loan transactions fell
within the time period for which Mr. Nevett reasonably should have
retained records documenting his receipt and disbursement of the loan
proceeds. In making this finding, the court primarily relied on Mr. Nevett’s
12 education, training, business experience, and sophistication, and on the
size and nature of these two transactions.
G. The bankruptcy court’s final ruling and Mr. Nevett’s appeals.
Based on its findings after trial and on its prior interim order on the
summary judgment motion, the court entered an “Order Granting
Summary Judgment and Denying Discharge.” The court recited that it had
previously determined that the UST had met her prima facie burden as to
the Gage, Pullman, and Bell loans totaling $925,000 in loan proceeds.
However, it applied its findings after trial to reduce further the
unexplained loan proceeds to only the $381,000 from the larger Pullman
and Bell loans. 4 As previously found in its interim order, the court noted
that the burden had shifted to Mr. Nevett to justify the failure to keep
adequate records for the disposition of those funds. The court then found
that Mr. Nevett had not justified the failure to keep adequate records for
the $381,000 in funds received from the Pullman and Bell loans warranting
denial of his discharge.
The court entered judgment pursuant to § 727(a)(3) denying Mr.
Nevett his discharge on August 8, 2019. Mr. Nevett appealed on August 22,
2019. This initial appeal was dismissed as interlocutory, see Nevett v. U.S.
4 The court discussed the Gage loan in its Order Granting Summary Judgment and Denying Discharge and concluded that it was not unreasonable for Mr. Nevett to have failed to preserve adequate records for that loan given the size of the loan and the testimony that it had largely been repaid. We construe this as a finding that Mr. Nevett established an adequate justification for the lack of records as to the Gage loan. 13 Trustee, BAP No. SC-19-1203 (9th Cir. BAP Mar. 3, 2020), because the
bankruptcy court’s decision had not disposed of the UST’s § 727(a)(5)
claim. In light of its denial of Mr. Nevett’s discharge under § 727(a)(3), the
bankruptcy court declined to dispose of the § 727(a)(5) claim.
Subsequently, based on the parties’ stipulation, the court entered
final judgment on the § 727(a)(3) claim in accordance with Civil Rule 54(b),
made applicable in adversary proceedings by Rule 7054. Mr. Nevett timely
appealed the final judgment.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(J). We have jurisdiction under 28 U.S.C. § 158.
ISSUE
Did the bankruptcy court commit reversible error when it denied Mr.
Nevett’s discharge pursuant to § 727(a)(3)?
STANDARDS OF REVIEW
As stated in Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir.
2010), in cases concerning denial of discharge under § 727, we typically
apply the following standards of review:
(1) the [bankruptcy] court’s determinations of the historical facts are reviewed for clear error; (2) the selection of the applicable legal rules under § 727 is reviewed de novo; and (3) the application of the facts to those rules requiring the exercise of judgments about values animating the rules is reviewed de novo.
14 (quoting Searles v. Riley (In re Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004),
aff'd, 212 Fed. App’x 589 (9th Cir. 2006)).
We rely on the court’s initial grant of summary judgment as to the
adequacy and necessity determinations and review those issues de novo. 5
5 The parties do not challenge the bankruptcy court’s use of summary judgment by which it entered an “interim” order that it held in abeyance while it conducted an “evidentiary hearing,” and then entered a final order granting summary judgment. As such, we express no opinion as to the propriety of the procedures used except to note that it has complicated our review on appeal. The court granted summary judgment after conducting an evidentiary hearing and making findings of fact. This appears internally inconsistent and raises concerns about the appropriate standard of review. However, Civil Rule 42(b) (made applicable in adversary proceedings by Rule 7042) authorizes trial courts to “order a separate trial of one or more separate issues, claims, crossclaims, counterclaims, or third-party claims.” (Emphasis added.) In addition, Civil Rule 56(g) (made applicable in adversary proceedings by Rule 7056) enables courts to grant partial relief on a summary judgment motion by identifying specific material facts as not genuinely disputed and thereafter treating those facts as established. In substance, this is exactly what appears to have happened here. But any final ruling following partial resolution of the case by summary judgment and partial resolution of the remaining issues after trial would still be a judgment after trial. For this reason, we treat the court’s denial of discharge as a decision after trial on separate issues limited by its prior grant of summary judgment. Even then, the court’s findings after trial could be read as revisiting its initial order on summary judgment as it revised the court’s prior summary judgment on the adequacy of the records produced. As the findings of fact after trial revised the scope of the summary judgment granted, they could call into question the propriety of applying de novo review to the two issues determined by the initial grant of summary judgment: the adequacy of the records produced and the necessity for such records. See Hussain v. Malik (In re Hussain), 508 B.R. 417, 424-25 (9th Cir. BAP 2014) (applying clearly erroneous standard of review to both elements of creditor’s prima facie case under § 727(a)(3)). But in this instance, the court’s Order Granting Summary Judgment and Denying Discharge reaffirmed the initial grant of partial summary judgment as to the remaining unexplained balances of the Bell and Pullman loans, so we treat the summary judgment as controlling on the issues of adequacy and necessity. We also note that our result would not differ if we were to treat the court’s determinations of adequacy and necessity as findings after trial, which would be subject to the more deferential clearly erroneous standard. 15 See Ingenco Holdings, LLC v. Ace Am. Ins. Co., 921 F.3d 803, 808 (9th Cir.
2019).
But there is another issue we must address complicating the
applicable standards of review. Even though the bankruptcy court
determined the justification issue after trial, this issue arguably could be
viewed as a mixed question of fact and law requiring the application of
facts to the applicable legal rules. If so viewed, a reflexive recitation of
Retz’s standards of review could mistakenly lead to a conclusion that all
mixed questions of fact and law are subject to de novo review. But the
determination of the applicable standard of review is more nuanced.
There are two distinct categories of mixed questions: those where
legal issues predominate and those where factual issues predominate. See
U.S. Bank Nat’l Ass’n ex rel CWCapital Asset Mgmt. LLC v. Vill. at Lakeridge,
LLC, ___ U.S. ___, 138 S. Ct. 960, 967 (2018). When the mixed question
principally requires the court “to expound on the law, particularly by
amplifying or elaborating on a broad legal standard,” the mixed question is
considered predominantly legal and is subject to de novo review. Id. But
when the mixed question primarily requires the court to make a case-
specific inquiry based on a group of facts already established — or to make
an additional factual inference from those facts — the resolution of the
question is inherently factual in nature, and the appellate court needs to
apply the more-deferential clearly erroneous standard of review. Id. at 967-
68; see also Aspen Skiing Co. v. Cherrett (In re Cherrett), 873 F.3d 1066 (9th Cir.
16 2017) (“Mixed questions are typically reviewed de novo, but, depending on
the nature of the inquiry involved, may be reviewed under a more
deferential clearly erroneous standard.” (cleaned up)).
Assuming without deciding that the justification question presented
herein qualifies as a mixed question of fact and law, it is precisely and
unequivocally the latter type of mixed question —a predominantly factual
one. To resolve this question, the bankruptcy court needed to look at the
totality of circumstances presented and decide whether a reasonable
person would have been justified under the circumstances in failing to
keep adequate records. As the Ninth Circuit has stated, the justification
question hinges on “whether others in like circumstances would ordinarily
keep [records].” Caneva v. Sun Cmtys. Operating Ltd. P'ship (In re Caneva),
550 F.3d 755, 763 (9th Cir. 2008) (quoting Lansdowne v. Cox (In re Cox), 41
F.3d 1294, 1299 (9th Cir. 1994)).
Consequently, we will apply the de novo standard of review to the
adequacy and necessity issues, and we will apply the clearly erroneous
standard of review to the justification issue.
When we review a matter de novo, we consider it anew as if it were
not previously ruled on by the bankruptcy court. Francis v. Wallace (In re
Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014). In contrast, a factual finding
is not clearly erroneous unless it is illogical, implausible, or without
support in the record. In re Retz, 606 F.3d at 1196.
17 DISCUSSION
A. General Legal standards governing § 727(a)(3).
The bankruptcy court must deny the debtor a discharge if he or she
fails to keep or preserve written records from which his or her financial
condition and material business transactions can be ascertained. § 727(a)(3);
In re Caneva, 550 F.3d at 761 (citing In re Cox, 41 F.3d at 1296). Thus, in order
to qualify for a discharge, § 727(a)(3) requires the debtor to maintain
sufficient financial records to enable his or her creditors “reasonably to
ascertain his present financial condition and to follow his business
transactions for a reasonable period in the past.” Id. (quoting Rhoades v.
Wikle, 453 F.2d 51, 53 (9th Cir. 1971)).
To rule on a § 727(a)(3) claim, the bankruptcy court typically must
engage in a two-step process. Brandenfels v. Ticor Title Ins. Co. (In re
Brandenfels), BAP No. OR-14-1145-FJuKi, 2015 WL 5883317, at *6 (9th Cir.
BAP Oct. 7, 2015), aff'd, 692 F. App’x 461 (9th Cir. 2017). First, the court
must consider whether the party challenging the discharge has made a
prima facie case by demonstrating that: “(1) the debtor failed to maintain
and preserve adequate records; and (2) this failure rendered it impossible
to ascertain the debtor’s financial condition and material business
transactions.” In re Hussain, 508 B.R. at 424 (citing In re Caneva, 550 F.3d at
761). And second, if the plaintiff meets its prima facie case, “the burden
shifts to the debtor to justify the inadequacy or nonexistence of records.” Id.
18 B. Mr. Nevett’s arguments on appeal.
Mr. Nevett’s arguments on appeal are relatively sparse and limited in
scope. Relying principally on the length of time that passed between the
loans at issue and when he filed for bankruptcy, Mr. Nevett challenged the
court’s determination that adequate records were needed but not provided
for these loans. Charitably construed, this argument implicates both
elements of the UST’s prima facie case, as well as the justification question.
We address each of these questions below.
1. Adequacy and necessity of records.
In his opening appeal brief, Mr. Nevett did not directly challenge the
bankruptcy court’s determination that the debtor failed to create and
preserve adequate records regarding his use of the $381,000 consisting of
Pullman and Bell loan proceeds. Instead, he argued that he kept and
produced copious records generally covering his transactions and financial
condition during the four years immediately preceding his bankruptcy
filing — from January 2012 to December 2015. Mr. Nevett contended that
the 2012 through 2015 records were “adequate” in the general sense. He
also argued that the UST did not need anything else to understand his
financial condition at the time he filed bankruptcy or his material
transactions.
In the alternative, Mr. Nevett argued that to the extent he did need to
keep records specifically addressing his earlier use of the Pullman and Bell
loan proceeds, and his failure to keep or produce such records was
19 inadequate, the UST should have requested them from third parties instead
of seeking to deny his discharge.
Strikingly, the debtor-appellant in Caneva made almost identical
arguments. There, the debtor Caneva owned or controlled roughly fifteen
businesses and admitted during his Rule 2004 exam that he kept no records
for these entities. Similarly, he had no documentation concerning a
$500,000 payment he made to an individual named Bowden. Creditor Sun
Communities Operating Limited Partnership objected to Caneva’s
discharge and sought summary judgment on its claim under § 727(a)(3).
The bankruptcy court entered summary judgment in favor of Sun, and the
district court affirmed the bankruptcy court’s judgment.
On appeal to the Ninth Circuit, Caneva argued that Sun could have
obtained any necessary records regarding the $500,000 transaction with
Bowden from the public record generated in his criminal prosecution. He
further asserted that the substantial quantity of documents he did keep and
produce concerning other transactions he was involved in and other
aspects of his financial condition were sufficient to create a genuine issue of
material fact regarding both elements required to establish Sun’s prima
facie case — both the adequacy of records kept and the need for additional
records to understand his finances and transactions.
The Ninth Circuit rejected Caneva’s arguments and affirmed the
summary judgment. It explained that § 727(a)(3) imposes an “affirmative
duty” on debtors to create and preserve records. In re Caneva, 550 F.3d at
20 762 (citing Peterson v. Scott (In re Scott), 172 F.3d 959, 969 (7th Cir. 1999)).
The Caneva court further observed that the more sophisticated the debtor,
the more demanding his or her duty to keep records — both in terms of
quantity and quality. Id. Based on this reasoning, Caneva held:
when a debtor owns and controls numerous business entities and engages in substantial financial transactions, the complete absence of recorded information related to those entities and transactions establishes a prima facie violation of 11 U.S.C. § 727(a)(3). Likewise, we hold that when a debtor transfers a substantial amount of money to a third party, the failure to keep any documentation evidencing the terms of the transfer or the fact that the payment actually took place establishes a prima facie violation of 11 U.S.C. § 727(a)(3). Id.
Caneva recognized that the debtor still could have avoided summary
judgment if he had presented sufficient evidence to demonstrate a genuine
issue of material fact “as to whether such failure [to keep records] was
justified under the circumstances.” Id. at 763. Caneva concluded that the
debtor presented no such evidence, in the process noting that a “transfer of
a half million dollars is the kind of transaction for which most business
entities would preserve some record.” Id.
Here, Mr. Nevett admitted during his Rule 2004 examination that he
kept no records to support his claimed disposition of the Bell, Pullman, and
Gage loan proceeds, supposedly used to purchase interests in third party
entities or, alternatively, to pay his business and personal debts. Nor did
Mr. Nevett attempt to retract this admission in his summary judgment
21 opposition. At the time of the bankruptcy court’s summary judgment
ruling, the amount of the Bell, Pullman, and Gage loan proceeds
unaccounted for was $925,000. Given the substantial amount at issue, there
was no genuine dispute that this amount required documentation. And
Mr. Nevett conceded he had not kept any records for these three loans. The
UST established for summary judgment purposes that a financially
sophisticated, educated, and experienced businessman had failed to
produce any records to establish the disposition of close to a million dollars
where he had been able to do so for other similar loans borrowed during
that same time frame. Following Caneva, as we must, the absence of any
records for the use of these significant loan proceeds established not only
the inadequacy of the records kept but the need for such records in order to
understand Mr. Nevett’s finances and transactions.
Though the bankruptcy court here subsequently modified its ruling
after trial by giving Mr. Nevett credit for the content of his check registers,
which accounted for the disposition of $544,000 of the $925,000, the
remaining $381,000 unaccounted for is still a substantial sum. Mr. Nevett
has never argued that the $119,000 difference between the $500,000
unaccounted for in Caneva and the $381,000 ultimately unaccounted for
herein distinguishes his appeal from Caneva. Nor are we aware of any
reasoned basis for saying so.
22 In short, under Caneva, the bankruptcy court correctly granted
summary judgment in favor of the UST on the adequacy and necessity
elements required for its prima facie case under § 727(a)(3).
2. Justification.
Mr. Nevett primarily contends that the court erred by imposing a six-
year lookback period for requiring records relating to his use of the loan
proceeds from the Pullman and Bell loans. According to Mr. Nevett, on the
record presented, the bankruptcy court clearly erred when it found that his
failure to keep such records was unjustified. More specifically, he
maintains that it was unreasonable to expect him to keep such records
given that these two loan transactions occurred between four and six years
prior to his bankruptcy filing.
Mr. Nevett additionally points to his testimony that the loan
proceeds were used to invest in companies that since that time had failed
and over which he had no control. Thus, he reasons that he should not be
faulted for his inability to obtain the missing records from them. He further
insists that the voluminous records he produced detailing his financial
condition and business transactions within three years of his bankruptcy
filing amply demonstrated the reasonableness of his record keeping
practices.
The justification issue requires the court to consider all of the relevant
circumstances of the case. In re Cox, 41 F.3d at 1297. “If the extent and
nature of the debtor’s transactions were such that others in like
23 circumstances would ordinarily keep financial records, she must show
more than that she did not comprehend the need for them.” Id. “In such
cases, the justification must indicate that because of unusual circumstances,
the debtor was absolved from the duty to maintain records herself.” Id.
The following non-exclusive factors can help inform the bankruptcy
court’s consideration of the justification issue: “debtor’s education, the
sophistication of the debtor’s business experience, the size and complexity
of debtor’s business, debtor’s personal financial structure, and any special
circumstances.” Tan v. Tranche 1 (SVP–AMC), Inc. (In re Tan), BAP No. NC–
06–1372–RSD, 2007 WL 7541007, at *12 (9th Cir. BAP Sept. 28, 2007); see also
In re Cox, 41 F.3d at 1299 (referencing the same list of factors and citing in
support Singer Sewing Co. v. Harmon (In re Harmon), Adv. No. 91–00147,
1992 WL 13624, at *5 (Bankr. W.D. Tenn. Jan. 10, 1992)).
These same factors also inform the court’s decision regarding how far
back it is reasonable to expect a debtor to keep records regarding his
financial transactions. See Sfadia v. Dongkuk Int'l, Inc. (In re Sfadia), BAP No.
CC–06–1176–MaBPa, 2007 WL 7540987, at *11 (9th Cir. BAP Sept. 5, 2007)
(“Debtors are required to keep records for a ‘reasonable’ period of time for
§ 727(a)(3) purposes, and a court’s determination of ‘reasonableness’
depends on the particular facts and circumstances of each case.”).6
6The court and the parties cited a number of cases addressing what constitutes a reasonable lookback period for purposes of § 727(a)(3). See, e.g., Snyder v. Dykes (In re Dykes), 590 B.R. 904, 912-13 (8th Cir. BAP 2018); DeWine v. Scott (In re Scott), 566 B.R. 471 (Bankr. N.D. Ohio 2017); Menotte v. Hahn (In re Hahn), 362 B.R. 542, 548 (Bankr. S.D. Fla. 24 We disagree with Mr. Nevett that the bankruptcy court’s finding that
it was reasonable under the circumstances to have expected Mr. Nevett to
maintain records regarding his use of the Pullman and Bell loan proceeds
was clearly erroneous. In addition to the age of these two loan transactions,
the court considered the amount and nature of the transactions, the nature
of Mr. Nevett’s overall business dealings, the millions of dollars in loans
and investment funds Mr. Nevett managed during the course of his career,
the types of records he typically kept, and his overall level of
sophistication, education, and experience.
The court also considered Mr. Nevett’s trial testimony and the
contents of the check registers he produced, which contradicted his earlier
Rule 2004 exam testimony regarding his use of the loan proceeds. Mr.
Nevett testified during his Rule 2004 exam that he used $400,000.00 of the
Pullman loan proceeds to invest in O’Quinn LLC. His check registers
established, however, that Mr. Nevett used $28,000 of the Pullman loan
proceeds for purposes that were not related to O’Quinn, LLC. Similarly,
Mr. Nevett testified during his Rule 2004 exam that he used the $500,000
from the Bell loan to invest in Location Based Technology, but the check
2007), Structured Asset Servs. v. Self (In re Self), 325 B.R. 224, 241–42 (Bankr. N.D. Ill. 2005); Losinski v. Losinski (In re Losinski), 80 B.R. 464, 474 (Bankr. D. Minn. 1987). Virtually all of these cases recognize that what constitutes a reasonable lookback period must be determined on a case-by-case basis. But see In re Self, 325 B.R. at 241 (listing two cases limiting lookback to a period of two years before the bankruptcy filing absent evidence of avoidable transfers or dissipation of assets).
25 registers established that Mr. Nevett used at least $491,000 of the Bell loan
proceeds for personal expenses rather than investing in Location Based
Technology.
Additionally, the bankruptcy court expressed concern that, in spite of
his borrowing millions of dollars in the years leading up to his bankruptcy
filing, Mr. Nevett and his spouse had less than $10,000.00 in cash and in
bank accounts at the time they filed their petition.
Based on all of these circumstances, the bankruptcy court inferred
that Mr. Nevett lacked sufficient justification for failing to maintain
adequate records regarding his use of the Pullman and Bell loan proceeds.
On this record, this inference was logical, plausible, and supported by the
evidence.
It is clear that Mr. Nevett views the evidence differently and would
instead infer from the evidence that his failure to keep adequate records
was sufficiently justified. However, even if we assume that Mr. Nevett’s
posited inference is likewise logical, plausible, and supported by the
evidence, the court’s choice between two reasonable views of the evidence
is not clearly erroneous. Anderson v. City of Bessemer City, 470 U.S. 564, 574
(1985).
3. Intent.
Finally, Mr. Nevett argues that any failure on his part to keep
adequate records was innocent and inadvertent, as opposed to intentional
and culpable. Mr. Nevett maintains that it was inappropriate for the court
26 to “punish” him for failing to keep adequate records in the absence of bad
faith or other wrongful intent. This argument lacks merit. As Mr. Nevett
concedes, fraudulent or bad-faith intent is not required to support a claim
under § 727(a)(3). In re Cox, 41 F.3d at 1297; accord, Sterling Int’l, Inc. v.
Thomas (In re Thomas), Adv. No. 01–06321, 2003 WL 21981707, at *9 (Bankr.
D. Idaho July 17, 2003). Therefore, we reject Mr. Nevett’s intent argument.
CONCLUSION
For the reasons set forth above, we AFFIRM the bankruptcy court’s
judgment denying Mr. Nevett his discharge under § 727(a)(3).